Taking Stock

Harris Teeter ‘Sales Exploration’ Sounds Like ‘Sales Declaration;’ Ahold Seen As Leading ‘Explorer’

In my career I’ve written close to 50 stories about retailers or major consumer packaged goods companies seeking to explore strategic options or alternatives. The end of that pursuit almost always results in the “exploring” company selling.

So, I’m not buying the implication that Harris Teeter’s hiring of investment firm J.P. Morgan solely because two private equity firms expressed interest in acquiring the extremely desirable Matthews, NC retailer is just that. I think there’s more to the story.

Sure, it’s important for Harris Teeter to let its associates know that it wants to remain independent and strong and that its hand was forced when two Wall Street firms came a courtin’ (those types of inquiries are certainly material to the interests of HT’s shareholders). However, does anybody believe that, at the end of this process, Harris Teeter won’t be sold? It’s obvious that when you’re the hottest girl on the dance floor, there’s never a shortage of partners waiting in line.

And with the passing of every year, the upscale, service-oriented retailer seems to be getting better looking. From a measurable perspective over a five year view, virtually every metric – overall sales growth, earnings, share price, ID revenue and real estate expansion – have placed Harris Teeter among the leaders in its peer group.

And with intangibles such as morale of the associates, training and customer service, perception of its private label and overall enjoyment of the shopping experience, Harris Teeter also grades in the upper percentiles. And, did I mention that Harris Teeter’s 211 stores are all non-union?

Surely other suitors have come knocking on Harris Teeter’s door in the past, only to be told the company is not for sale. So why might this time be different?

Beyond the aforementioned fact that “The Teeter” has never been hotter are two thoughts: family perpetuation and Publix.

While Harris Teeter is publicly-traded, the stock is closely held by the Dickson family (a scenario similar to that at Weis Markets), who will no doubt have the primary say in the future of the company it acquired in 1969. At this point, CEO Tad Dickson is the only member of the family on the board. His father, R. Stuart Dickson left the board in 2006 (along with his brother Alan, who passed away last year). Tad Dickson is 58 years old and, like his father and uncle, cut his teeth in the thread business at American & Efird, a company that was sold in 2011. There seems to be no clear line of family leadership succession and much of the company’s success can be attributed to the work of Harris Teeter’s dynamic president Fred Morganthall and his team.

So, if there’s no clear path of succession and your company is rolling on all cylinders, wouldn’t the timing be right to consider selling?

And then there’s the Publix challenge. Although the two retailers are similar in style, appeal to a similar customer demographic and compete in several urban markets in the Southeast, the announcement last year that Publix would enter HT’s backyard in Charlotte couldn’t have been heartwarming news to the folks in Matthews.

Publix announced thatCharlottewould serve as a separate operating division for theLakeland,FLmerchant, its northernmost expansion to date (it has already opened two stores in suburbanCharlotte.)

While it won’t be easy to take business away from HT in its core region, Publix’s skill and patience will certainly adversely impact the long-term market share leader.

And Harris Teeter knows as well as anyone (just based on the number of sales inquiries it’s received over the years) that it is a very desirable commodity.

Don’t count out Kroger or Publix (which has never acquired a company as large as HT) as potential suitors. And while private equity started this process and always has access to a lot of capital, this strikes me as more of a strategic deal than a financial one.

That leaves Ahold. Flush with cash (especially after gaining another $3.1 billion for selling its 60 percent stake in Scandinavian grocer ICA in the past month) and hungry for acquisitions, Harris Teeter would be an ideal fit for the Dutch grocer, given the type of company it would desire and the adjacencies Harris Teeter would provide to its other stores.

If Ahold were to gain control of Harris Teeter, its network would encompass nearly 1,000 stores with dominant locations and strong market shares in New England, Metro New York, Delaware Valley, Central Pennsylvania, Baltimore-Washington, Richmond and (potentially) Tidewater as well as the key markets in North Carolina and parts of South Carolina.

So, my bet’s in: Harris Teeter will be sold by the end of the summer and I’m predicting that Ahold will pay handsomely for that prize.